Tag Archives: EU

Post navigation

In its various forms, from sticks to pellets to sawdust, wood (or to use its fashionable name, biomass) accounts for about half of Europe’s renewable-energy consumption.

One has to ask “What the hell were they thinking?” Clearly, instead of thinking, the EU political elites were seduced by Greenpeace, FOE and similar activists. The EU defines “renewable” to include wood (biomass) but excludes nuclear power. This upside-down perspective has led Germany (via subsidies) to spend more than $350 per ton CO2 avoided by mass harvesting of forests around the globe.

The Economist has done a real service by detailing this bizarre EU policy. I hope that we can rely upon “Herbert Stein’s Law,” which he expressed as “If something cannot go on forever, it will stop”. Or my shorthand “What can’t continue won’t”.

So we know the EU energy policies are not the future. But we don’t know how long this fantasy can persist. Merkel faces re-election in September – can we hope for a shift towards evidence-based energy policy?

Here’s a few excerpts from The Economist:

(…) By far the largest so-called renewable fuel used in Europe is wood.

In its various forms, from sticks to pellets to sawdust, wood (or to use its fashionable name, biomass) accounts for about half of Europe’s renewable-energy consumption. In some countries, such as Poland and Finland, wood meets more than 80% of renewable-energy demand. Even in Germany, home of the Energiewende (energy transformation) which has poured huge subsidies into wind and solar power, 38% of non-fossil fuel consumption comes from the stuff. After years in which European governments have boasted about their high-tech, low-carbon energy revolution, the main beneficiary seems to be the favoured fuel of pre-industrial societies.

(…) But if subsidising biomass energy were an efficient way to cut carbon emissions, perhaps this collateral damage might be written off as an unfortunate consequence of a policy that was beneficial overall. So is it efficient? No.

Wood produces carbon twice over: once in the power station, once in the supply chain. The process of making pellets out of wood involves grinding it up, turning it into a dough and putting it under pressure. That, plus the shipping, requires energy and produces carbon: 200kg of CO2 for the amount of wood needed to provide 1MWh of electricity.

This decreases the amount of carbon saved by switching to wood, thus increasing the price of the savings. Given the subsidy of £45 per MWh, says Mr Vetter, it costs £225 to save one tonne of CO2 by switching from gas to wood. And that assumes the rest of the process (in the power station) is carbon neutral. It probably isn’t.

(…) As another bit of the EU, the European Environment Agency, said in 2011, the assumption “that biomass combustion would be inherently carbon neutral…is not correct…as it ignores the fact that using land to produce plants for energy typically means that this land is not producing plants for other purposes, including carbon otherwise sequestered.”

Tim Searchinger of Princeton University calculates that if whole trees are used to produce energy, as they sometimes are, they increase carbon emissions compared with coal (the dirtiest fuel) by 79% over 20 years and 49% over 40 years; there is no carbon reduction until 100 years have passed, when the replacement trees have grown up. But as Tom Brookes of the European Climate Foundation points out, “we’re trying to cut carbon now; not in 100 years’ time.”

In short, the EU has created a subsidy which costs a packet, probably does not reduce carbon emissions, does not encourage new energy technologies—and is set to grow like a leylandii hedge.

What will the implications be for Europe and the stabilization of the euro zone?

This is similar to the blunder in Deauville with PSI that injected credit risk into sovereign government debt. The governments have created risk in what before last week were considered perfectly safe deposits. This is going to have a chilling effect on deposits in any bank in a country perceived to be weak. This will mean the cost of funding will increase in the periphery of Europe and as a result, the cost of financing for businesses and households will increase. That will add to the divergences we already have and make the recession in the periphery of Europe deeper than it already is. This is really a disaster for European economic management as a whole

This is by far the best explanation of what has happened in Europe. Read the whole thing.

Capital controls turn into trade controls, as the locals attempt to find ways to turn hard assets or non-banking services into foreign exchange. At some price, for example, you can buy a boat in Cyprus with post-haircut, capital-controlled local deposits, sail it to Lebanon, and then sell it for real, usable money. The same with antiques, jewellery, or anything else you can think of. Even capital goods such as fork lifts can be motored off in the middle of the night.

Reinhardt, Rogoff and Maduff did a meta-analysis in 2011 on prior studies of capital controls. The only uncontroversially (though mildly) successful use of controls on outflows they found was Malaysia in the aftermath of the Asian financial crisis. Even then, the controls were accompanied by aggressive counter-cyclical spending, bans on short-selling the currency and trading it offshore, and defending the ringgit against speculators by fixing it to the dollar.

(…) If I can spend my dollar in Oregon but not in California, it is really the same dollar? I think not.

Is this how the Eurozone experiment will end? Not with a formal “exit,” but with a return to banking dominated by national boundaries and enforced by capital controls? No longer a true common currency, but a dozen currencies sharing the same name, each with a different value?

There will be another banking crisis in Europe (just as a bank will fail in some US state) and depositors are now aware that they are fair game in any crisis response, so capital flight will intensify at an earlier stage in the crisis. As may have been noted, European policymakers find rapid crisis resolution to be something of a challenge, thus accelerated capital flight will necessitate a more rapid imposition of capital controls in the future – and with each round of capital controls, a new sub-euro will be born.

Bottom Line: Europe’s response to the Cyprus situation will have long-lasting impacts on the Eurozone experiment itself, none of the good. Indeed, the imposition of capital controls should lead one to wonder if the “solution” to Cyprus is effectively an exit from the Eurozone is everything but name. And don’t forget that the crisis also threatens to destabilize the regiongeopolitcally. I don’t think that “disaster” is too strong a word in this case.

Looks like the answer is yes – but the EU elites don’t have to formally recognize the exit.

Long-term network analysis by the European Network of Transmission System Operators for Electricity (ENTSO-E) suggests that by the end of this decade, 80 per cent of the bottlenecks in European power grids are directly or indirectly related to integration of renewable energy sources. Transmission system operators (TSOs) across Europe – and to an increasing extent their counterparts at the distribution level (DSOs) – are struggling to cope with the overwhelming introduction of intermittent renewable energy, wind and solar power in particular. There are two main problems to consider with renewables. The first is the fact that their generation capacity is non-dispatchable in the sense that its production cannot be increased upon request by the TSO. The second is that their intermittent power generation necessitates the availability of more fast-responding dispatchable power units to maintain system frequency at 50 Hz.

(…)In addition, there are increasing calls for a pan-European obligation for renewable generators to become responsible for ‘balancing’ their own production.

Imagine that – a renewable utility is required to pay the full cost of of their intermittent production! That would zero-out new renewable construction overnight. Altogether this is a refreshing article on EU energy policy that isn’t a puff piece by the wind/solar lobbies or suppliers. Timon Dubbeling wrote this for European Energy Review. He has been studying International Energy Markets at the Institut d’Etudes Politiques (IEP) – SciencesPo Paris. And he is currently doing an internship at the European Network of Transmission System Operators for Electricity (ENTSO-E).

My short summary is that the magical thinking behind EU energy policy is beginning to collide with reality, especially economic reality. The EU countries have erected a monstrosity of subsidies and regulations designed around the goal of making voters and politicians feel good and righteous about themselves.

Now that troubles are becoming obvious, the EU approach to cope with this mess is not to erase the subsidies and regulations that have caused the grid instability. It is to erect yet another tower of regulations. To rescue actual dispatchable generation from closure, a new patchwork is already being implemented – “Capacity Remuneration Mechanisms” (CRMs). Timon again:

Italy became the latest country to support its thermal units in this way, joining countries like Spain, Portugal, Ireland, Greece and some Nordic countries who had already done so. France, Germany and the UK are also considering implementing capacity markets.

(…) In an attempt to prevent the closure of their conventional power plants, an increasing number of European countries have implemented or are considering implementing capacity remuneration mechanisms (CRMs).

(…) For all of these reasons, the European Commission is very critical of national CRMs. In a leaked draft version of a Communication on the Internal Energy Market, scheduled to be published in mid-October, the Commission shows itself worried about their impact on market functioning. The Communication states that “the Commission expects Member States not to intervene and introduce capacity mechanisms before carrying out a full analysis of the existence and possible causes of a lack of investment in generation”. It continues by stating that “Member States should analyse the necessity and the impact of their planned intervention on neighbouring Member States and on the internal energy market”.

(…) Revision of the status quo

The obvious shortcomings of CRMs will add to the pressure to change the rules underlying electricity markets. In order to achieve the triple ambition of EU energy policy to create a low carbon economy on the basis of competitive markets that guarantee security of supply, renewable generators are likely to be burdened with more duties and lose some of their current privileges. If renewables are the main reason that conventional power plants are driven out of the market, then – recognizing that the potential of demand-side response, stronger interconnections and electricity storage is limited in the short term – they will have to step up their contribution to the long term security of power grids.

As ‘balancing-responsible’ parties they would have to match their production with demand through the power exchange or by OTC trades. If they fail to do this, they would have to pay a balancing charge, like other market players. The level of this charge has to be high enough to push for more discipline among renewable generators – in any case higher than the revenues they receive through their support scheme.

Making renewable generators responsible for balancing will push them to be more prudent in their forecasts, thus reducing the need for flexible reserves. A possible drawback is that wind and solar PV units might be curtailed more to avoid imbalances. In order to prevent structural losses of renewable output, such a measure should therefore go hand in hand with the development of liquid intraday markets, where gate closure time (GCT) – the last moment where producers are able to submit their bids – is as close to real time as possible. Bringing GCT closer to real time will lead to more accurate output predictions and a more efficient activation of renewable power assets.

A second major reason why we may expect the role of renewables to change is that currently they are the main driver of grid investment needs, as shown in figure 2. A more integrated vision of renewable production and the needs of the power grid will considerably reduce the need for expensive investments in transmission cables. In most European countries, legal provisions oblige the local TSO to provide any renewable generator access to the transmission grid. The costs of extending and reinforcing the grid are most often ‘socialized’ through Use of System Charges (UoSC). As a result, renewable energy project developers have no incentive to build plants near demand, and instead build at locations with the strongest wind or the most sun-hours per year. If there were less need for grid operators to connect remote wind and solar plants, or if some of the associated cost is shifted to the generator itself, it would allow for capital-constrained TSOs to address other weak spots in the transmission system. (…)

The article goes on at length to consider an alphabet soup of ad hoc patches intended to undo the unintended consquences of existing renewable subsidies. The hated word “nuclear” is not mentioned once. Nor is any consideration of returning electrical supply to free markets.

Meanwhile the earth weeps. While politicians avoid consideration of any policies that would actually work.

Italy’s public debt hit an all-time high in June of almost 2 trillion euros and the annual budget deficit was also bigger than a year before, due largely to Italy’s share of bailouts for other euro zone states, the central bank said on Monday.

I’m not confident that this analysis is correct, but it sure bears consideration. There are some scary feedbacks that can excaberate the stresses of the periphery:

…This is why the monetary side is so critical. If both Spain and Italy move from the ranks of the bailing out to the bailed out, the fiscal burden on the rest of the euro area rises, pushing other members toward crisis.

Niall Ferguson and Nouriel Roubini are clanging the alarm bells – original article here, archived copy here. The authors conclude with these three paragraphs:

(…) By contrast, the European banking crisis is a real hazard that could escalate in days. Germans must understand that bank recapitalization, European deposit insurance and debt mutualization are not optional; they are essential to avoid an irreversible disintegration of Europe’s monetary union. If they are still not convinced, they must understand that the costs of an EZ break-up would be astronomically high—for themselves as much as anyone.

After all, Germany’s prosperity is in large measure a consequence of monetary union. The euro has given German exporters a far more competitive exchange rate than the old Deutschmark would have. And the rest of the EZ remains the destination for 42% of German exports. Plunging half of that market into a new Depression can hardly be good for Germany.

Ultimately, as Angela Merkel, the German chancellor, herself acknowledged last week, monetary union always implied further integration into a fiscal and political union. But before Europe gets anywhere near taking this historical step, it must first of all show it has learned the lessons of the past. The EU was created to avoid repeating the disasters of the 1930s. It is time Europe’s leaders—and especially Germany’s—understood how perilously close they are to doing just that.

John Cochrane thinks the renewed bank competition in Greece by HSBC and the like is good news.

Why is this good news, you may ask? It’s just feeding the run away from local banks, which have invested heavily in now-tanking local economies and loaded up on sovereign debt.

Here’s the answer. My favorite solution for Europe is sovereign default and keep the common currency. (Actually, that’s my second favorite. Free market reforms tomorrow, start growing like China on Monday and pay back the debt is my real favorite, but we can only dream so much.)

The natural rejoinder is, what about the banks? Since the local banks have all loaded up on sovereign debt, then the banks will all go under, and won’t that be a disaster?

My response has been to remind people of the difference between existing banks and a functional banking system. Countries need a functional banking system. They do not need all of the existing banks to continue, nor do they need all of the existing bank’s creditors not to lose a cent.

Read the whole thing. Then read John’s nearby post “Simon Johnson on the Euro“. Now that I’ve read both, and Simon’s essay I am just as worried as I was this morning. Dr. Cochrane may be correct that “sovereign default and keep the common currency” is the best available option. But is there any political support for that path? I don’t think so. I think the politicians will keep doing what they have been doing, making the same mistakes over and over. Kicking the can down the road, until Simon’s future arrives.

Italian Prime Minister Mario Monti walked away last week from negotiations with Italy’s labor unions and announced that he was going to move ahead with reforming the country’s notorious employment laws—with or without union consent. If Rome is spared the fate that recently befell Athens, mark this as the week the turnaround began.

Italy’s labor laws are some of the most restrictive in the Western world. The totemic Article 18 all but bans companies with more than 15 employees from involuntarily dismissing workers, regardless of the severance offered. Mr. Monti has proposed replacing this job-for-life scheme with a generous system of guaranteed severance when employees are dismissed for “economic reasons.”

In most of the free world, this would count as a useful, albeit mild, reform. Among other weaknesses, the new law would not affect a worker’s right to challenge his dismissal in court when fired for disciplinary reasons—an unreciprocated gift to the unions.

But standing up to Italy’s labor unions takes courage, and not only of the political sort. Ten years ago this month economist Marco Biagi was gunned down by left-wing terrorists for his role in designing a previous attempt at labor-market reform. Today, Mr. Monti’s move has prompted calls for a general strike from CGIL, Italy’s largest union confederation.

(…) Postwar Italian politics has chewed up more than a few would-be reformers while career politicians and union leaders enjoy the spoils of power. The difference with Mr. Monti is that he didn’t take this job to be a caretaker PM. If he means to make his current reform the first, not last, step in a more ambitious agenda for reviving Italian growth, he could make his one term in office a great one.

(…) The French government is currently in negotiation with unions to keep hospitals open and in the midst of economic downturn French society is debating the merits of the 35-hour work week, now in its 12th year. But that isn’t stopping President Nicolas Sarkozy, who campaigned on too much vacation time in 2007, from attacking it. “I tell you this because it is a pure fact: lowering the retirement age to 60 and the 35-hour work week were serious mistakes that we are still paying heavily for.”